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Cutting out sugar intake may help you to keep yourself healthy. However, if you have ignored the sector on Dalal Street you might have missed an opportunity to sweeten your equity portfolio in the ongoing calendar year.

Take this: Data shows that as many as 23 stocks from the sector have more than doubled investors’ wealth in 2021 so far. With a rally of 404%, Simbhaoli Sugars has emerged as the top gainer in the list. Shares of the company have jumped to Rs 38.60 on July 9 from Rs 7.66 on December 31. It was followed by Rana Sugars (up 382%), Dharani Sugars (up 377%), SBEC Sugar (up 275%).

Other sugar majors including Dalmia Bharat, Mawana Sugars, Shree Renuka Sugars, KM Sugar Mills, Magadh Sugar, Parvati Sweeteners, Triveni Engineering, Riga Sugar, Dwarikesh Sugar, Dhampur Sugar, Ponni Sugar, Sakshi Sugars and Mawana Sugars have also gained between 100%-230% during the same period.

From cyclical to structural

Commenting on the sugar sector, ICICI Securities in its report said that the sector has seen a turnaround from being cyclical to a structural growth sector backed by the government’s aggressive ethanol blending programme. In the current ethanol procurement cycle, oil marketing companies (OMCs) would be procuring more than 300 crore litre of ethanol against 180 crore litre last year, which is closer to around 8% blending levels.

“We believe more than 15% blending levels would help the sugar industry to divert 6 million tonnes (MT) of excess sugar produced every year. With aggressive distillery capacity addition in India, sugar companies would see strong earnings growth over the next three years,” the brokerage said.

20% ethanol blending

In June 2021, the government released a roadmap for ethanol blending programme that clearly set forth all important factors and guidelines for OMCs, auto OEMs, sugar and other related industries. This depicts the government’s seriousness to implement the programme.

“With increasing molasses and grain-based ethanol capacity, 10%, 20% ethanol blending by 2022, 2025, respectively, is achievable. The industry would divert 6 million tonnes of equivalent sugar toward producing ethanol. This would reduce the sugar inventory to rational levels and drive domestic sugar prices upwards. We expect sugar prices to move towards Rs 36-37/kg by September 2022,” ICICI Securities said.

With the massive increase in distillery capacities by sugar companies, ethanol sales are likely to double going ahead. ICICI Securities estimated that ethanol sales would contribute 25-30% to revenues of major sugar companies by FY24. Moreover, reducing sugar inventories in the system are likely to push domestic sugar prices upwards.

There are expectations that these factors would boost earnings for sugar companies in the next three years. Despite, the huge run up in the sugar stocks, valuation multiples are still 5-10x FY23 PE. Amid hopes of strong earnings growth visibility, sugar stocks are likely to command higher valuation multiples.

Stocks to buy

Brokerage ICICI Securities is positive on Balrampur Chini with a target price of Rs 515. It is also bullish on players like Dalmia Bharat (TP: Rs 650), Triveni Engineering (TP: Rs 270), Dwarikesh Sugar (TP: Rs 110), Dhampur Sugar (TP: Rs 500) and Avadh Sugar (TP: Rs 685).